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EU: Financial Transaction Tax (EUC Report)

Volume 750: debated on Tuesday 17 December 2013

Question for Short Debate

Asked by

To ask Her Majesty’s Government what assessment they have made of the Report of the European Union Committee Financial Transaction Tax: Alive and Deadly (7th Report, HL Paper 86).

My Lords, I am delighted to introduce the new EU Committee report, Financial Transaction Tax: Alive and Deadly. I thank fellow members of the Sub-Committee on Economic and Financial Affairs, which undertook this inquiry, for the contributions they will make today, and other distinguished Members of the House.

This is an update report on the Commission’s contentious proposals for a financial transaction tax, following on from our March 2012 report, Towards a Financial Transaction Tax?. That report found the Commission’s proposals seriously wanting, and likely to fail the five objectives that the Commission had set itself. We contended then that there was a significant threat of relocation of financial activity outside the EU as well as the City of London, were the FTT to go live. You would have imagined that we would have rejoiced when the proposals for such an EU-wide FTT later ran into the sand—far from it. Let me explain.

In June 2012, a breakaway group of 11 member states, led by France and Germany, announced their intention to proceed with an FTT under the enhanced co-operation procedure, whereby nine or more member states can take a proposal forward without binding those who do not wish to participate. The UK Government made clear, with my committee’s support, that they would not participate. However, we were deeply alarmed that the proposal could nevertheless have a serious detrimental impact on the UK. We grew even more agitated when the Council vote approving use of the enhanced co-operation procedure went ahead without a text having been published—a veritable case of buying a pig in a poke.

Three weeks later, on 14 February 2013, the Commission did indeed publish its detailed proposal, but the revised version included new and disturbing anti-avoidance provisions, including the significant issuance principle. When we took evidence from Commission official Manfred Bergmann in March 2013, he told us, to our open-mouthed astonishment, that there would be no legal obligation on UK authorities to collect the new tax. This contradicted our view that the United Kingdom could indeed be obliged to collect the tax on behalf of participating member states under the EU regime, which requires all member states to assist each other in the recovery of tax. In our view, the proposal failed to meet the key criterion for enhanced co-operation, which requires that any proposal must respect the competences, rights and obligations of all non-participating member states.

We urged the Government to launch a legal challenge against the proposal. The Government belatedly took our advice, and in April this year challenged the use of enhanced co-operation. In the mean time, we asked the Commission to provide urgent clarification of the feared legal obligation that the United Kingdom authorities would have to collect the tax. This, the Commission signally failed to do for a full six months.

Later, a leaked Council Legal Service opinion concluded that the deemed establishment principle, on which the proposal was based, did not comply with the treaty requirements for enhanced co-operation on several grounds: notably, that it would represent extraterritorial taxation; it could discriminate to the detriment of other parties caught by the deemed establishment principle; it failed to respect the competence of non-participating member states; it would distort competition; and, finally, it would inhibit the free movement of capital.

In light of these significant developments, we undertook this short update inquiry, taking evidence from Heinz Zourek, Director-General, Taxation and Customs Union, European Commission. Our findings are clear: in our view, the Commission has failed to demonstrate that it has taken full account of the interests of non-participating member states. The Commission confessed that it had brought forward a deliberately contentious proposal with the studied intention of challenging participating member states to excise those elements they found inimical—an unworthy and divisive tactic. Moreover, it undermines the Commission’s obligations to defend the interests of all member states and throws into doubt use of the enhanced co-operation tool in the future—a significant by-product of this study. In contrast, we found the Council Legal Service opinion highly persuasive. It demonstrates in concrete terms how the proposal would breach European Union law in respect of the integrity of the single market. Moreover, we jib at the Commission’s artificial distinction between imposing the financial transaction tax and the collection of the tax from member states.

We published our report last week but already events have moved on. Media reports emerged that the Commission had finally produced a legal reply to the Council Legal Service. In addition, the Financial Times last week reported a compromise proposal emerging from the Lithuanian presidency, seeking to limit the tax’s broad scope while still retaining the element of restraining the impact on high-frequency trading. However, we understand that the compromise did not address key issues of extraterritoriality or the dubious legality of the tax. What update can the Minister give us on these negotiations? Does he predict, as we do, that the political weight behind the FTT—often misunderstood in this country—means that a proposal will nevertheless emerge in some shape or form? What efforts is he making to ensure that the potential damaging effect of such a tax is limited not only for the United Kingdom and other non-participants but, indeed, for all European Union member states?

I should warn the Minister that we do not let the Government off scot-free either. While we welcomed their legal challenge, we are frustrated that it took so long for them to sit up and take notice of the repeated, and increasingly admonitory, warnings that we have spelt out in no fewer than 12 letters to his ministerial colleagues over the past 18 months. What update can he give us on the progress of the Government’s legal challenge? When does he expect the Court of Justice to reach a decision? What assurances can he give us that the Government are taking the proposal, and its potential implications for the City of London, the United Kingdom and, indeed, the entire European Union, seriously? Are the Government engaging positively in negotiations in Brussels as they unfold, especially with other non-participating member states?

The financial transaction tax is a real and present danger to the City of London, Europe’s premier global financial centre, and to all of us who derive pensions and savings from its teeming financial activities.

My Lords, I simply want to reinforce one specific point that has just been made by the noble Lord, Lord Harrison. Our report raises an important issue concerning the deployment of the enhanced co-operation procedure itself. The FTT case is only the third time the procedure has been used since it came into being in 1999, but it could well become more commonplace in a future where different groups of EU nations wish to take different courses, or proceed more quickly than others.

In the FTT case, the use of the procedure has left a bad taste in the mouth. When it was put to the vote last January, I imagine that, in abstaining, our Government naively assumed that the terms of the tax to be adopted would mirror those the Commission had already put forward and which had failed to find favour with many states, including the UK. But as the noble Lord, Lord Harrison, has said, the proposal the Commission advanced only three weeks later was significantly different, not least in its assertion of the twin principles of “deemed establishment” and “issuance”. That combination of principles could clearly have a major impact on financial institutions in non-participating and third-party countries which could not have been foreseen at the time of the vote.

It seems unlikely that the Commission was entirely unaware of the principles and their potential impact when the vote took place. Was this a matter of oversight or deviousness on the part of the Commission and sponsoring countries? Who knows? However, one can imagine that had the boot been on the other foot and a principal sponsor had been the UK, tales of Albion’s traditional perfidy would have been doing the rounds in the corridors of Brussels. This has not been one of the European Union’s finest hours and I say so sadly, as a strong supporter.

As to the lessons for the future, whatever the outcome of the FTT proposal, the enhanced co-operation procedure needs to be tidied up, made more robust and be seen to be fair. Put simply, all significant cards need to be face-up on the table when a vote is taken to adopt it. Ideally, a fully fledged scheme should be worked up and open to scrutiny before a vote is taken, accompanied by a thorough impact assessment that distinguishes between participating and non-participating countries, and with an analysis of any extra-territorial consequences. Without a reformed approach along these lines, what could be a useful and effective procedure will simply fall into disrepute. That is not in the interests of the European Union or its member states and I hope that, when the dust has settled on the specific FTT issue, the Government will take the initiative in calling for reform of the enhanced co-operation procedure itself.

My Lords, I congratulate the noble Lord, Lord Harrison, on securing this debate. My contribution, like that of others, will necessarily be short and I will take a broad brush to this issue. I am a member of the EU Select Committee and of the Economic and Financial Affairs Sub-Committee, which conducted this inquiry. I think I speak for all of us when I say that we considered the financial transaction tax looking for a kernel of benefit to this country and a scintilla of logic behind the imposition of the tax. What we found, it is fair to say, was instead a desire to generate revenue quickly and to punish the financial institutions that it was thought had landed the whole of Europe—indeed, perhaps the whole world —into the sort of financial difficulties that we now experience.

That certainly ignored the issue of extraterritoriality. It also seemed to ignore the legitimacy of the tax itself and the tax’s impact on the financial markets, particularly, for example, on high-frequency trading. The consequences, as the noble Lord, Lord Harrison, has said, would include damage to the City: if the tax comes into being, it will almost certainly drive business away to places such as New York, Hong Kong and Singapore. Then there is the impact, as has already been said, on the 17 non-participating states and perhaps even on the whole of the EU. To put it another way, enhanced co-operation, on this occasion at least, seems to be the minority dictating to the majority, to the detriment of all.

We were disappointed by the slow take-up by Her Majesty’s Government, as has already been said, and by the sanguine approach adopted by the EU, which was typified in the evidence that was given to us on 19 March by Manfred Bergmann, the director of indirect taxation and tax administration at the EU— DG TAXUD is the acronym. Mr Bergmann seemed to take a particularly benign view of what would happen, and his evidence on the impact of the issuance principle, so far as it applied to non-participating states, was surprising. We welcomed the fact that the Council’s own legal service gave an opinion which, according to our report, said that,

“the deemed establishment principle does not comply with the Treaty requirements for enhanced cooperation”.

It listed a number of grounds, but perhaps the most important was the fact that the tax, if it comes into being,

“would exceed the norms of customary international law in respect of extraterritorial taxation”.

Her Majesty’s Government, as we have already been told, are now making a legal challenge—seeking an opinion of their own, if you like. I suppose one could say that is better late than never. Indeed, the timetable for that is already a matter of record in your Lordships’ Chamber.

In conclusion, I simply ask the Minister whether there is any chance at all that, if the result of the Government’s legal challenge reflects the advice of the Council Legal Service, the Government will adopt a more robust stance so far as the FTT is concerned, to the benefit of the whole country and, indeed, the whole of Europe.

My Lords, one of the reasons given for the introduction of the financial transaction tax is to punish the banks. This is a populist idea into which, I am afraid, our Government have also fallen. We do not want to punish the banks, we want to punish the bankers. The problem is that the bankers have all now gone, taking with them their bonuses and severance pay, and we are left with the banks, which we want to rebuild and whose balance sheets we want to get stronger. Instead, we impose levies on them and ask them for better borrowing ratios and to build up their reserves. When they are trying to do this, as well as dealing with a loan book that is looking a bit dodgy, we then complain bitterly that they are not lending to small and medium-sized enterprises. I am afraid that you cannot have it all ways round and we have to do something to encourage our banks to strengthen their balance sheets rather than tax them, which is of course what we would be doing with the financial transaction tax.

This morning we were debating in our committee what the priorities were for the EU. One of the areas identified was tackling the serious problem of unemployment, which looks to be structural in the EU today, and in particular the very high levels of youth unemployment. So what do we do? We introduce the financial transaction tax, which seems to be coming down the road and, according to an impact assessment conducted by the Commission, will cost 1.76% of gross domestic product in the EU and 500,000 jobs. Since then, the Commission has said, “No, that is not accurate”. Okay, I will take half of that: perhaps we will see GDP depressed by 0.85% and it will cost only 250,000 jobs. That is all right then, isn’t it? It will cost a fortune and do everything to counter the objectives of the EU such as bringing down unemployment—it will actually increase unemployment. This is the extraordinary way that this Commission operates.

Many of your Lordships have been to Brussels. Do we ever hear the people in the Commission talking about how they will make the EU more competitive and how they will deal with the challenges from the global marketplace? No, they are always talking about themselves and as if the EU were the centre of the universe, which to an increasing extent it is not. The EU is facing up to a diminishing share of world trade as time progresses, and it is time that it started to look outwards rather than inwards, and work out how it will face these challenges. The impact assessment thoroughly analysed that a lot of this business will be pushed abroad, and that is why it will cost so many jobs.

We then questioned the gentleman from the Directorate General of Taxation and Customs Union, did we not? We asked him, “What are you going to do about getting these other stock exchanges and so on to collect this tax?”. “Oh”, he said, “We are going to incentivise them to collect this money”. We said, “Really? How are we going to do that?”. He said, “We will allow them to keep the interest on the tax that they have collected for six months”. What world is this so-called intelligent man living in? Does he really think that the United States will collect taxes for foreign countries? It is quite unbelievable, and this is the real problem behind all this. I cannot imagine why anyone would want to stay in the EU, and I am glad that we will have an opportunity to get out of it in 2017.

My Lords, I congratulate my noble friend Lord Harrison on securing this debate. Like the noble Lord, Lord Dear, I take a wide view of this but want to focus on a couple of issues around the Treasury’s response, globalisation and the unreality of the course being proposed. We would all like to see a financial transaction tax that spans the globe, but it is totally impractical, as is such a tax that is driven by 11 members of the EU. The tax is too small and incomprehensible in how it will run.

We have heard the various arguments around specific concerns but we need to look at the unintended consequences of domestic legislation in a global financial world in which we have often seen ingenuity outrunning regulation. It is the lot of this market that it is ingenious and finds ways around things. As a precedent, we need only look at what happened in Europe in the 1960s, when the famous Regulation Q from the United States drove business offshore; it just shifted and created the Eurodollar market in the UK. It was a great achievement, and it is on that that London’s success is based. It is therefore rather strange that we are looking and not learning from those sorts of lessons. Inevitably, this activity will be driven offshore, and it will take with it jobs, data centres and all those things because these people need to be near the source of the power that drives it. The market will go to Hong Kong, Singapore and New York.

While other noble Lords have dealt with issues of enhanced co-operation and so on, I should like to focus on the issue before the Treasury. As our report shows, despite repeatedly calling the attention of the Treasury to the threats posed by the FTT, it was only in May that we had recognition of the issue and the concession that significant economic impact would result. I normally have a high opinion of Her Majesty’s Treasury but I have to say that on this occasion it was rather like the proverbial dog watching television: it could see it but did not get it. I hope now that the Treasury has got it because, unless there is an understanding of the consequences of the FTT, we will be in a serious place.

We should now look forward. One of the great successes of Britain in the post-war era was its re-emergence as the great centre of finance. That was driven by the Eurodollar. It is rather ironic that the people who drove it forward were, in fact, Harold Wilson and Lord Cromer. They understood the prize to be won, grasped it and created what now is a major source of national wealth. It would be slightly ironic if this market-friendly Government were unable to moderate or prevent the FTT. It would be interesting to hear from the Minister how we are going to preserve our place as the leading financial centre of the world.

My Lords, a policy conceived in revenge, born under the enhanced co-operation procedure and nurtured on envy, is a sad and frightening prospect. The FTT is such a policy, and unfortunately it is alive and deadly, as our report states.

Our report savages the proposal for the FTT. We are by no means alone: a recent report by Oxera for Marex Spectron reckoned that the FTT would destroy more sources of revenue than it would create public funding: it will cost more than it receives. Deutsches Aktieninstitut is also heavily critical of the FTT. It says that,

“the burden of the FTT as proposed by the European Commission amounts to between 5.0 and 7.3 billion euros annually for private households and non-financial companies in Germany”.

The Corporation of London has also been very critical and reckoned that the impact of the FTT would be higher for non-participating member states than for participating ones. We have to remember that the non-participating ones are in the majority. There will be further reports in the new year, and I have no doubt every one will be critical.

The attitude and behaviour of the Government has been commented on. It saddens me that my former department, the Treasury, has not improved its procedures. It was very slow to react in the first place. With hindsight, I remember we were not very quick in responding to ERM as we should have done. I thought lessons had been learnt. I have been on the committee since the first report was published, and I have noticed how almost offhand the correspondence has been. Since the change of Minister that has improved, and I ask my noble friend to make sure that that improvement continues, because it is vital that the Government listen to and work with the committee, rather than against us.

As for the Commission, there is not much left to say. I, too, sat open-mouthed at the evidence we took in Brussels from Mr Zourek. It was unbelievable, thoroughly unconvincing, almost unreal and not something I had ever expected to hear from the Commission.

Can my noble friend say something about the timing for the resolution of differences between the Commission and the Council’s legal opinion? That is important. Furthermore, is there a timing for, and any more information on, the resolution of our objection, and when will the objection by Luxembourg, on the same grounds as that of UK, be heard? Will it be at the same time as ours?

My Lords, we are, as you see, very critical of the proposed FTT, for the reasons laid out in both reports, that of March 2012 and now this one.

I, too, have never seen such criticism of a Government’s response to an inquiry as can be found in paragraphs 12 to 20. I asked the Minister to explain why such a detailed and well researched report from a parliamentary committee was treated in such a dismissive way for so long. The lack of recognition and acceptance of the issues raised at the time have left us where we are now, and it is an example of the UK’s lack of engagement on what may become EU policy.

This brings me to the perceived attitude of our Government to the EU. All too often, we are prepared to say that our main interest is the single market and we are far too negative about most other things when we should not be. For example, regardless of whether we stay in the EU, amend the treaties, or get out, the success of the eurozone is important, not only to us but to the rest of the world. Suffice to say, a little more diplomacy, and less barracking from the sidelines, would not go amiss. Government ambitions for their future in the EU may be difficult, or even impossible, to achieve currently. However, that makes its lack of engagement in such issues as the FTT even more inappropriate. The adoption or otherwise of this tax will not sink the EU, but we could have had much more influence on what is now happening.

I wish to comment on this tax from the perspective of the majority of our citizens, who, like me, are lay people as far as finance is concerned. This is a direct tax and a bad precedent, not only on businesses but on individuals, which will affect most financial transactions, not only for the millions who own or trade shares but for those who have pensions. Almost everyone will be affected directly or indirectly. This is the thin end of the wedge, the slippery slope: a direct tax on individuals. Even worse, it is 11 countries attempting to tax individuals—nationals of countries outside their group and their own jurisdiction—entirely against their will and with no democratic mandate.

When a nation taxes its population, the Government must have a mandate and justify the purpose of doing so in a budget. There is no mandate or legal basis for this daylight robbery. Even worse than that, it is most inappropriate at present. I ask the Minister what the Government will do to ensure that this country and our citizens will not be adversely affected. I will just have time to address this if I borrow a little of the time of the noble Lord, Lord Flight. Box 1 of our report gives the objectives—I will not read them all—as laid out. On objective (a), as far as I am aware, there is currently no fragmentation to worry about. Objective (b) talks about the costs of the recent crisis. None of what we are talking about, or the bank resolution fund—which we are not talking about today, but which is important—refers to the current crisis and the cost. It is all about the future. Objective (c) adds:

“To create appropriate disincentives for transactions which do not enhance the efficiency of the financial markets and thus trigger overinvestment in activities which are not welfare enhancing”.

That is the woolliest rubbish of which one could possibly conceive. How on earth is an inert tax going to differentiate between actions which may not be welfare enhancing? That is absolutely ridiculous. Luckily, one other objective was dropped: namely, a new revenue stream that could gradually displace national contributions. Does anybody in this Room or anywhere else think that our contributions will ever be reduced by anything?

My Lords, I start by congratulating my colleagues, who did 90% of the work on this report before I joined the committee, on having done some sound work and having revealed, way ahead of the Commission or the Government realising it, the impact on non-participating states of this proposal.

By the way, the Government’s position is quite absurd. Most reasonable, sensible people litigate only when they feel very strongly about something. If they feel strongly about something they are given the opportunity to vote on, they vote against. This Government succeeded in abstaining and then in starting litigation. Their credibility is pretty small.

In my brief time, I will summarise in four propositions what I feel about this proposal, about which I do not take as tragic a view as many of my colleagues. The first proposition is that all taxes are unpopular. Any new tax produces an outcry, sometimes hysterical, from those who are going to be, or might be, impacted. One has to keep one’s cool against that noise.

Secondly, all taxes have perverse economic consequences. I say to the noble Lord, Lord Hamilton, that all taxes, as a first-order effect, reduce GDP because they reduce demand. Whether they ultimately have a negative effect on a net basis depends on how that money is spent by the taxing authority. However, direct taxes are enormously dangerous because they impact directly on incentives to work, to save, to take risks, to set up enterprises and to invest. On the other hand, indirect consumption taxes have the effect of impacting most, by definition, on people with the highest consumption ratios—in other words, the poorest people in society—so they are very unfair. The financial transaction tax has neither of those two disadvantages. If you implemented it around the world, it might be pretty close to being an ideal tax.

Thirdly, contrary to what you might expect theoretically, tax arbitrage, or displacement of financial markets in response to taxation, is actually much less effective and efficient than you might suppose, for a whole host of reasons. One is that people always want to trade in the deepest markets. If you move out of the most liquid, deepest markets, you will find that you are operating against wider spreads, which will more than compensate for any avoidance of tax. That is particularly true if, as in this case, a tax is 10 basis points.

The main reason why the market in trading in UK equities has not moved into derivatives, contracts for difference, the option market and so forth is because people would be paying for much greater spreads than they would be gaining on the stamp duty tax—that tax, of course, is 50 basis points. There are other reasons why there is not so much displacement as you might expect, one of which is the time zone problem, another of which is that financial markets, particularly clearing houses and their principal customers—the major banks—do not like cutting across major tax authorities. They are particularly terrified of the IRS, of course, but they do not want to have an argument with any major tax authority, including, in this case, the Fisc or the Finanzamt. They do not want to have an argument with the Inland Revenue, which is why, when they set up American depositary receipt markets in New York in British equities, the American banks concerned have always paid the stamp duty at the front end on an advance basis: I think it is something like 200 basis points. They have accepted that although I do not think that obligation could ever be enforced in a court of law. Perhaps the Minister will confirm this.

Finally, the report argues that this tax will impact in practice on a lot of investors, both retail and wholesale, and on a lot of residents—institutional and otherwise, corporate and otherwise—in this country, even though we do not participate in it. If we get none of the benefits because we do not receive any receipts from the tax, of course, and the benefits of displacement from other markets where they are participating directly in the tax are much less than anticipated, there may well come a time when the equation is such that it would be worth our while to join in the tax and join in sharing in the proceeds. This is a matter which we need—if the tax comes in at all—to keep permanently under review.

I would like to reassure the Minister that we support the Government’s present position. It was the abstention that surprised us, not the litigation. We were rather keen on the idea of litigation.

We have been disappointed by the disdain with which the Government have dismissed our concerns down the years. I was disappointed in 2012 when the Minister wrote to us, saying:

“We are sceptical whether other Member States will agree to a … sub EU-27 … FTT or that it would work. If they decide to go ahead with a EU17 FTT, it may not necessarily be bad for the UK because: UK may gain market share … and … the impact on the UK may be no different from that on other international financial centres outside the euro area such as New York or Hong Kong”.

Really? New York and Hong Kong are not subject to the mutual assistance directive; we are. New York and Hong Kong would not collect this tax, as the noble Lord, Lord Hamilton, pointed out. They would be laughing all the way to the bank. The true cost of the financial transaction tax—if it comes in—would be the transactions displaced, which would migrate offshore, out of the whole of the EU, including away from London. It is a pernicious proposal.

I was disappointed when the Government, in explaining why they abstained rather than opposed the idea of an FTT at 11, told us in Mr Clark’s letter this year that,

“the Government attaches great importance to the principle of tax sovereignty, and therefore believes other member states should be free to set their own tax policies … We also recognise that introduction of a FTT is of great importance to several of the participating member states. Voting against the authorising proposal, rather than abstaining, could have undermined these messages”.

I think that is completely absurd. I entirely agree with the doctrine of the principle of tax sovereignty, but that means that member states are entitled to impose whatever taxes they like in their own countries provided they do not discriminate against other member states and do not damage the interests of other member states. However, it does not mean that they are entitled to impose a tax that damages us because we have to collect it at no benefit to our Exchequer but at great damage to our markets. That is an absurd reading of tax sovereignty. It shows a defensive Treasury that is refusing to get out there, argue proactively and build alliances. After all, 17 member states are not going to implement this tax. Had we approached them and argued the EU interest, and argued that EU markets, including their markets as well as ours, would be damaged by this tax, I do not believe that it would have been impossible to block it. I think that the Government now agree, because they are litigating, that it is a highly undesirable measure.

I draw four short morals from this sad story. First, it is almost always a mistake to say, “Roll out the red carpet, let them do as they like, the business will come to London”. That was Boris Johnson’s position. As usual, he got completely the wrong end of the stick. Sadly, the Government seem to have held on to the wrong end of the stick for some considerable time.

Secondly, as the noble Lord, Lord Vallance, said, the enhanced co-operation procedure is a new procedure. Case law is being developed. It will take some time to construct sensible ground rules for ensuring that Articles 326 and 327 are respected. I suggest three rules: first, the substantive proposal must be on the table before the procedural decision is taken, as was suggested by the noble Lord, Lord Vallance; secondly, the Commission and the Council secretariat must ensure that any subsequent amendments do not introduce detriment to non-participants; and thirdly, the overall EU interest must be respected at all times by all the institutions, including the Commission, which must not allow itself to become the secretariat of a subset of member states.

Lastly, we know that the Treasury is short-staffed and short on EU expertise. It is all the more sensible, therefore, to listen to the expertise available in this House and stop dismissing our reports with delay and disdain. I know that the Minister will not do that.

My Lords, I declare an interest as the chair of the Policy Network think tank, which produced the report for the City of London Corporation on the future of financial services in Europe. It is available on our website and includes reference to the financial transaction tax.

The Opposition applaud this debate. We agree with what my noble friend Lord Harrison said. He posed a number of relevant questions to the Government and the Minister that need to be answered. A rethink of the financial transaction tax is probably under way in Brussels at the moment. I remember, as a naive young man, reading the article by the Nobel laureate James Tobin which first proposed a version of the financial transaction tax and being very impressed by it. However, it was always clear that it was a very difficult proposal. It would certainly be difficult to make it work unless there was a transatlantic agreement—in the modern world, it may not be possible to do it even then.

Enhanced co-operation raises hugely difficult issues in this area. Under the treaty, enhanced co-operation can go ahead only where it does not do damage to the member states that are not taking part. Therefore, the Government were right in this case to mount a legal challenge. I am not normally of the view that one should conduct one’s engagement in the European Union by mounting legal challenges—negotiation is much better—but in this case, where enhanced co-operation was being pushed ahead in a way that was detrimental to other member states, they were right to take the matter to court.

Anyone who has talked to people on the ground knows that this proposal has run into great difficulties, that many of the member states that initially supported it are having very serious second thoughts and that it is almost certain that the Commission proposals will be heavily revised. We do not know what the outcome of that will be, but the existing proposal looks pretty dead in the water.

However, noble Lords have to take into account the extremely strong feeling on the continent—and in this country—that it was the financial sector that caused the crisis and it is the financial sector that has to pay for the consequences of its irresponsibility. Of course, that is not an argument for a financial transaction tax but that is the principle on which a lot of the political momentum behind this proposal is based. It is linked to the idea that when things go wrong in future there should be bail-ins, not bailouts, and is intended to provide revenues for dealing with bank resolution in the future.

In Britain we have raised taxes on the financial sector. The bank levy is now going to be £3 billion by 2018-19, and stamp duty will be a similar amount. So £6 billion a year, more than we raise in wine duty, vehicle excise duty and inheritance tax, will come from specific taxes on the financial sector. We should talk to our partners about much more effective ways of taxing the financial sector across the Union and get rid of this unfortunate enhanced co-operation proposal.

My Lords, I am extremely grateful to the noble Lord, Lord Harrison, for introducing the report, and to all noble Lords who have spoken. I think that all bar a couple of members of the committee have participated in the debate or are here. I therefore feel that I am giving evidence to the committee rather than making a speech to the Grand Committee, which makes the challenge all the more formidable. As one would have expected from the committee, the document is thorough and well researched, and is bound, as previous reports on this subject have been, to help colour perceptions and debate in Brussels and across the EU, where sometimes the reports of your Lordships’ EU Committee are read more carefully than they are in the UK.

The committee’s report makes a number of points with which the Government strongly agree. First, the committee expresses strong misgivings about the legality of the FTT proposal. Obviously, the Government share those misgivings and that is why we have taken the case to the European Court of Justice. As the committee notes, of particular concern to the UK is the extraterritorial impact of the so-called residence principle, which, for example, would bring into scope of the tax a UK pension fund buying UK government bonds from the London branch of a bank headquartered in Frankfurt. This is, in our view, an infringement of the provisions of the treaty designed to protect the position of non-participating member states under enhanced co-operation, and that is at the heart of our challenge to the proposal.

That brings me on to the second point that your Lordships’ committee discussed and which has been raised this afternoon: the credibility of enhanced co-operation as a way of doing business at all. The committee makes the perfectly valid point that there is a real risk of harm to the credibility of enhanced co-operation as a tool in the future because of the way that it has been operated in this case. We agree that there has been a triple failure: in bringing forward this legislation in undue haste; in paying insufficient regard to the views of non-participating member states; and in failing to support the proposal with a sufficiently thorough impact analysis—a point tellingly made by the noble Lord, Lord Hamilton. We completely agree with the committee that, particularly if this tool is to be more frequently used, it must command the confidence of all member states. Indeed, this is the very point that the Government have been making to Council colleagues during these negotiations.

The conditions that govern the use of enhanced co-operation are set out in the treaty in quite high-level terms, which makes it important during these early uses of enhanced co-operation that the right precedents are set in order to give the kind of confidence that we believe all member states need if it is to be used more frequently. Like the committee, we do not believe that this has been a helpful precedent in that respect. The conditions set out by the noble Lords, Lord Vallance and Lord Kerr, about the future use of the procedure seem eminently sensible.

The third concern, rightly highlighted by the committee, is that it is highly unclear how the tax will be collected, and what collection obligations are implied for non-participating member states. What is clear, as the committee points out, is that the UK will be required to fulfil any obligations it incurs under the mutual assistance in recovery directive. For that reason, as the committee acknowledges in its report, we have included in our legal challenge the ground that an FTT would impose collection costs on non-participating member states that should properly, under the terms of the treaty, be fully borne by the participating member states.

However, there is a theme in the report on which I cannot agree with the committee: the suggestion that the Government have been in any way complacent in relation to the risks of an FTT. The Government made their concerns about an FTT clear from the outset. In November 2011 the Chancellor highlighted the serious problems with the Commission’s original proposal to other member states, and indeed UK-led opposition to what was on the table resulted in that proposal being dropped.

It was obvious then that the proposal had not gone away, and the Government were very soon considering, and indeed taking legal advice on, the implications for the UK of an FTT under enhanced co-operation. When Council authorisation for enhanced co-operation was sought at ECOFIN this January, we tabled a statement to the minutes of the meeting recording our serious reservations about the legality of the authorising decision. The report acknowledges the Government’s point that it would not have made a difference to a vote if we had voted against the decision, rather than abstained, but argues that we should have sought support for a blocking vote.

It is certainly true that the report quotes the Government’s view, but I do not think that we shared the Government’s view or acknowledged it as being correct. The view of the committee was that it was a pity that the Government had not been out seeking allies against the tax.

My Lords, we will probably have to agree to disagree on this. As the previous Financial Secretary pointed out in the correspondence that the noble Lord, Lord Kerr, quoted, it was clear from discussions that took place in the lead-up to the ECOFIN meeting that a qualifying majority of member states was prepared to support the authorising decision. Moreover, abstention had no bearing on the prospects for our subsequent legal challenge. The noble Lord, Lord Kerr, talks about building alliances, an issue that arose when we last discussed this matter, but we have to accept, as the noble Lord, Lord Liddle, pointed out, the strength of the political will across much of the EU to introduce this tax. The UK standing up to say, “We are going to vote against it” would not have affected that. It is inconceivable that this would not have gone ahead at that meeting, whatever we had done.

Perhaps the Minister can be helpful. The committee has made that point time and again. Would it be useful if the Minister demonstrated the activity of the Government in Brussels in talking to other member states: what canvassing they did and with whom they spoke? We would like to see the ocular proof of the Government’s enthusiasm to block this tax.

My Lords, I will not go through a blow-by-blow account of which member state we spoke to at which point. The view was taken, which I believe was the correct one, that at that stage this proposal was unblockable, because of the political will to which the noble Lord, Lord Liddle, referred. We may think that other member states are misguided. History may prove they are misguided. But there is a slight tendency in the UK to believe that we always know best. We may well know best in this case, but the French and the Germans think they know best, and it is a bold UK Government—or committee of your Lordships’ House—who are unambiguously sure that they know better than a large number of major EU member states.

My Lords, I put it to the Minister that the Government’s position is completely absurd. He is saying that the Government did not vote against this proposal because they thought they had a majority against them. Any democratic institution would break down if no one bothered to vote because they thought that at any one time there might be a majority against them. If the Government really felt strongly about something, so strongly that they were prepared to litigate, which is a much more provocative thing to do because it would put at risk all sorts of good will, the least they could have done would have been to have voted against it when they had the opportunity to do so. By not doing so, they lost a great deal of credibility.

As I said earlier, we will have to agree to disagree on that. I do not believe that the Government have lost credibility in the EU because of the stance they took. People believe that the Government understood the political realities.

I am sorry to interrupt the Minister again, but from all I hear, I do not think that there was a campaign with a ministerial delegation and a City delegation visiting capitals other than the 11 arguing the damage to their markets and ours—the overall EU market—which would result from the FTT. If I am wrong about that and such a delegation did go out to Europe, I will withdraw my criticism.

I believe that Policy Network is right when, in its report this week to the City of London Corporation, it states that there is an urgent need to:

“Upgrade the UK’s presence and leadership in Brussels by building up close ties with like-minded member states. Moving from a reactive to a preventive and agenda-setting position seems particularly paramount in that respect”.

I hope that the Minister will at least agree with that.

Perhaps I may ask a simple question. I think the Minister said that the majority of politicians in Europe wanted this tax and therefore it would be difficult. Can he explain how 11 out of the total of the member states comes out as a majority?

I apologise if I said that. What I meant to say was that there was not a qualified majority against the proposal. There was not a sufficient weight to prevent the proposal going through. I think that that was borne out by what happened at the relevant Council meeting.

My Lords, I have 12 minutes, of which I have used 11, and I have not answered a single substantive question posed by noble Lords. It is just possible that I might do so if I am allowed to respond to some of the points that have been raised.

I was asked where matters stand in terms of discussions in the Council. A Lithuanian document was produced last week which I think has been rather mischaracterised as to its significance. It is a short document and I have it with me. It was discussed briefly at last Thursday’s working group, but many participants were reluctant to discuss it, taking the view that the technical discussions should not run ahead of and potentially prejudice the more substantive discussions, so consideration of it was limited. There has been no substantive breakthrough in the negotiations recently, largely because of the situation in Germany. As noble Lords will be aware, the German coalition deal has now been ratified and we expect more progress in the new year.

The noble Earl, Lord Caithness, asked about the timing of the resolution of the difference between the Council and the Commission legal opinions. The conflicting opinions of the Commission and Council legal services were discussed by the 12 December working group and it is now for the Council members and the 11 participating member states to weigh these as they begin to consider a compromise proposal. We are not aware of any challenge from Luxembourg.

On the timing of the legal challenge, we have exchanged written arguments with the Council. Several member states and other eligible parties have intervened. Written proceedings will come to a close in January, and it is then down to the court. But, as noble Lords will be aware, oral proceedings would ordinarily take place after written proceedings close.

On the argument that has repeatedly been made about our engaging positively with other member states, the UK has been closely engaged with these negotiations from the start. We have held numerous meetings with other member states about the FTT. UK officials are closely engaged in the Council working groups, of which there have been five, including submitting detailed written technical questions to the committee. It simply is not the case that we have not been and will not continue to be fully engaged.

I have gone over my time, for which I apologise. I thank the noble Lord, Lord Harrison, and members of the committee again for the report, and for generating what has been, as usual, an extremely stimulating debate.

I apologise; the noble Lord’s comments have provoked a number of interventions. Can he promise the Committee that he will write to us on those many questions which he was eager to answer, and give us full and ample replies to those which he was not able to reach?